Tuesday, February 12, 2013

Felix Salmon is one of my favorite journalists, but he routinely makes a common error: forgetting that there is such a thing as politics. Take this reflection on Tim Geithner in which Salmon wonders what made the former Treasury Secretary "change his mind" on how to deal with financial crises:

[T]he most obvious case in which Geithner has done a complete U-turn from his former views is that of Indonesia. The great Australian financial journalist Peter Hartcher explained this very well back in 2009, when Geithner took over as Treasury secretary. He quoted former Australian president Paul Keating explaining in a nutshell exactly what Geithner did wrong: “Tim Geithner was the Treasury line officer who wrote the IMF program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis.” With hindsight, Geithner did the exact opposite of what he is now prescribing in the event of a crisis...

Indonesia in 1998 had a problem not dissimilar to what we saw in the US 20 years later: a sudden credit crunch afflicting a country whose government finances were fundamentally sound. Geithner’s solution, now, is for the government to “be very aggressive” spending money, and for the central bank to provide its own monetary support, all in the service of “compensating for the huge collapse in private sector demand”. But that’s not what he thought in 1998, when he forced the Indonesian government to cut spending and raise interest rates — precipitating a recession much larger than anything the US saw during the financial crisis.

Now that Geithner is going to write a book, I very much hope he goes as far back as Indonesia, and covers his two-year tenure at the IMF as well, rather than glossing over those episodes on the way to the juicy stuff about the more recent crisis. For one thing, it will be fascinating to see when and how his mind changed on such issues. And for another thing, it’s conceivable that the book might shed light on the how this consummate career government technocrat thinks — and thereby shed light on much of the system of global governance.

This type of commentary bothers me because it is so common (which is why I keep harping on it). Isn't it possible, just possible, that an American public official might respond to a crisis in the United States differently than to a crisis in Indonesia for political reasons? Isn't it possible, just possible, that the reason why the IMF pushed Asian (and Latin American) countries into austerity in exchange for emergency finance is because the IMF's creditors cared more about getting their money back than about finding the most optimal solution to the problem? Isn't it possible, just possible, that an American central banker or Treasury Secretary might care more about American interests (and interest groups) than those of, say, Thailand? Of course those things are possible. So why doesn't Salmon mention them as a possibility?

There is quite a lot of political economy research on the IMF. None of it concludes that it is an impartial technocratic institution. It is involved in power politics, generally in ways which benefit US interests. It lends in a way that benefits the American financial sector. It trades lax conditionality for UN votes on the Security Council and in the General Assembly. It adjusts conditionality requirements based on the recipient's geopolitical importance, and enforces conditionality more or less strictly based on a country's ties to major powers. This is but a small sampling of the literature demonstrating that the IMF is a political, and politicized, institution. It acts in the interests of the major stakeholders in the major powers, especially the United States (which is the only country which possesses an effective veto on IMF funding decisions). The IMF is not on a relentless pursuit for the Most Optimal Policy as determined by the economists' imagined technocratic Benevolent Social Planner. (Needless to say, the US Treasury Department and Federal Reserve are even more political.)

In other words, when parsing Geithner's career we do not need to make an assumption that he has been on a quest to find technocratic nirvana. We don't have to assume that he's had a Road to Damascus moment which caused him to change his mind on key issues. All we have to note is that an American policymaker, when faced with very different crises in very different countries with very different levels of geopolitical importance reacted... very differently. That makes sense! That is what we should expect from an interested government official.